The Dollar Cost Averaging (DCA): an investment strategy aiming to reduce the impact of Bitcoin’s volatility

The article highlights Dollar Cost Averaging (DCA) as a strategy to navigate Bitcoin's volatility. DCA involves regular fixed investments in Bitcoin, shielding investors from emotional trading and reducing short-term volatility impact.

The Dollar Cost Averaging (DCA): an investment strategy aiming to reduce the impact of Bitcoin’s volatility
March 24, 2024
Marius

One of the barriers to Bitcoin's adoption as an everyday currency is its volatility, which can see fluctuations of 5 to 10% in a single day. This is why investing all your money at once can be a bad idea if you don’t understand what you are doing, and a more thoughtful and methodical investment strategy is preferable

Among the various strategies that exist, Dollar Cost Averaging (DCA) stands out, especially when dealing with a volatile asset like Bitcoin.

In this article, we will delve deeper into the DCA strategy, explain its advantages, how to implement it, and the benefits an investor can derive from it.

What is Dollar Cost Averaging (DCA)?

DCA is an investment technique that involves allocating a fixed amount into an asset (in this case, Bitcoin) at regular time intervals, regardless of the asset's price fluctuations in the market.

For someone to adopt a DCA strategy, it's crucial that they do not dwell on price movements or try to anticipate them. This task is complex and close to trading, an activity that takes years to master.

A study conducted by the Financial Markets Authority (AMF) in 2014 revealed that nearly 90% of retail traders were losing money due to the complexity of the task.

The number one enemy of a trader is the emotions that market movements provoke. An inexperienced investor is likely to act out of greed for fear of missing out (FOMO) or in distress from the fear of losing money.

The DCA strategy allows investors to invest in Bitcoin without being influenced by market movements, requiring them to not closely follow the price's evolution.

This approach enables investors to detach from the market fluctuations and invest for the long term, making their investment robust against short-term market volatility. DCA helps to average the purchase price over time, thus reducing the impact of volatility on the overall investment.

Why should you use DCA for Bitcoin?

Bitcoin is known for its significant price movements. For investors, this represents both an opportunity and a risk, because although Bitcoin's price has consistently risen over the long term, it can lose up to 70 or 80% of its value over several months in the medium term.

DCA offers a way to navigate this volatile environment by investing small sums of money regularly, which allows for building a Bitcoin stack in a more predictable and less stressful manner.

Let's consider a concrete example: if, in November 2021, you were considering buying $1,000 worth of Bitcoin (BTC) in a single transaction while the Bitcoin price was at $69,000, you would have acquired 1.45 million satoshis (0.0145 BTC) and suffered a 77% loss at the lowest point of November 2022. Today, with Bitcoin back at $69,000, you would have broken even.

Bitcoin price chart showing the performance of the single purchase (in white) and the average purchase with a DCA strategy (in blue)

Conversely, if you had opted for a DCA strategy by investing $100 in Bitcoin on the first day of each of the 10 months from November 2021, your total investment would have been $1,000 and would have given you a more favorable average purchase price of $35,900, holding a total of 2.78 million satoshis (0.0278 BTC) valued at $1,900 at the current rate.

In short, Dollar Cost Averaging (DCA) smooths out the market's highs and lows, making the investment less susceptible to panic movements or euphoria, thus mitigating the inherent volatility of the Bitcoin market. While it does not guarantee to outperform the market, it represents a more cautious approach.

This strategy is simple and accessible, making investing in Bitcoin feasible even for novices. Moreover, DCA encourages a disciplined and long-term investment approach.

Implementing DCA in Bitcoin

To implement DCA, it is recommended to allocate part of the money you typically set aside. It is important not to invest more money than you can afford.

If you invest more money than you can afford in the hope of quick gains, you will be more tempted to sell at the slightest drop. Remember, the DCA strategy only works in the long term; don't expect to become rich overnight.

Select a fixed amount you can allocate to Bitcoin, considering your daily and monthly expenses, such as bills, food budget, activities, hobbies, etc.

Plan before you start how frequently you will buy. For example, if you plan to spend $1,200 a year, you can plan to invest $100 per month or $23 per week.

It's possible to find exchange platforms that allow scheduling recurring purchases, or you can do it manually by buying from someone you personally know, for example.

Conclusion

Dollar Cost Averaging is a proven investment strategy particularly suited to Bitcoin, offering a less risky entry point for those who do not want to engage in the complexities of trading.

By spreading the investment over time, DCA allows investors to gradually build their exposure to Bitcoin while mitigating the impact of volatility. Although this method may reduce potential gains in a strongly rising market, it has the significant advantage of promoting a disciplined and long-term investment approach.

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